Fixed upstream emission rates undermine the climate benefits of section 45V hydrogen production tax credit

The Issue

Fixed upstream emission rates undermine the climate benefits of section 45V tax credit.

Under the current version of 45VH2-GREET, the upstream methane and CO₂ emissions rates associated with extracting, processing, and transporting natural gas are fixed at nationwide average rates: 0.9% for methane and an unknown value for CO₂. Treasury’s proposed fixed rates are both over- and under-inclusive of true upstream emissions. The fixed rates prevent operators with cleaner supply chains from proving so and in turn, prevent operators from achieving a higher section 45V tax credit. This can cause low-emissions projects to become economically unviable. On the other hand, a fixed rate allows operators with dirtier supply chains to claim an artificially lower emissions intensity for their hydrogen production, without incentive to improve their lifecycle emissions.   

The Solution

Remove any fixed upstream emission rate and require use of the project-specific data that is submitted for subparts W and C of EPA’s Greenhouse Gas Reporting Program (GHGRP). 

Hydrogen producers should be required to provide verifiable, project-specific data to establish their methane leak rates using the data the natural gas producers submit for subpart W of the GHGRP. Similar requirements should be made for upstream CO₂ emissions using subparts C and W. This data is already submitted by most natural gas operators, is familiar to the EPA, and is verified by built-in submission processes. This should be an all-in approach to ensure climate benefit and align with Congressional intent, removing the option for using a national average. Any option to rely on a fixed upstream emission rate will only allow operators with dirtier supply chains to benefit without reducing emissions.

Scenarios

Under the proposed guidance, (1) operators with lower leak rates are not rewarded, and (2) those with higher leak rates unfairly benefit from fixed upstream rates. 

1. Hydrogen Producer 1 produces clean hydrogen using steam methane reforming with 98% carbon capture. Producer 1 sources methane from a natural gas operator with upstream methane leak and CO₂ emission rates of 0.4% and 3.84 g CO₂/MJ respectively, which match the Northeast Pennsylvania basin average.¹ Producer 1’s hydrogen has a real-world lifecycle emissions intensity of 1.18 kg CO₂e/kg H₂, qualifying for tier 2 of the PTC ($1.00/kg H₂).² If Producer 1 produces 10,000 kg of hydrogen per hour, they could earn $87.6 million per year from the PTC using verified leak rates. But under the current fixed GREET rates, the hydrogen would have lifecycle emissions intensity of 2.66 kg CO₂e/kg H₂, only qualifying for tier 4 of the PTC ($0.60/kg H₂) and earning $52.6 million per year. Producer 1 would lose out on over $30 million per year in justified section 45V benefits, which could harm the economic viability of the low-emissions project. 
2. Hydrogen Producer 2 uses the same production configuration but sources natural gas with upstream methane leak and CO₂ emission rates of 6.13% and 7.41 g CO₂/MJ, per the Permian Basin average.³ Producer 2’s hydrogen will have a real-world lifecycle emission intensity of 7.08 kg CO₂e/kg H₂ and should not qualify for section 45V. However, under the current version of GREET using the fixed methane and CO₂ rates, Producer 2 qualifies for tier 4 of the tax credit ($0.60/kg H₂). If Producer 2 produces 10,000 kg of hydrogen per hour, they would unfairly earn $52.6 million per year from the tax credit for a project that does not meet section 45V emissions thresholds.  

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¹ Northeast Pennsylvania upstream methane leak rate from CATF analysis and upstream CO₂ leak rate from Ceres and CATF report. 

² Real-world emissions were calculated using CATF’s lifecycle analysis tool. All electricity and heat consumed were assumed to come from zero-carbon sources.   

³ Permian basin upstream methane leak rate from CATF analysis and upstream CO₂ leak rate based on data reported nationally to GHGRP subparts W and C.